Views from The Top

As Australia’s largest property owner with close to $45 billion across multiple sectors, we see the greatest opportunity as continuing to source off market long WALE preferably NNN leased assets across multiple sectors. Whilst Industrial is clearly going to see strong capital value growth from cap rate compression, we see other long WALE NNN sectors with much higher yields than Industrial will see even greater cap rate compression as investors come to appreciate the fact that often there are no incentives embedded in leases to the likes of Bunnings or ALH (largest pub tenant in Australia 85% owned by $50bn market cap Woolworths Ltd). Further, many of these assets are land rich ie they have a very high proportion of investment value as underlying land value. As investors become more discerning about the sustainability of tenant income and prospects for rental growth, these blue chip high visibility brand names on long leases will become like a “gold standard” for property investing. 

COVID-19 has accelerated structural changes that were already influencing performance across the property sector in Australia, requiring active management while also providing opportunities.  

For QIC Global Real Estate, there is a clear opportunity, and pressing need, to evolve our retail assets into genuine mixed-use, retail-anchored Town Centres, responding to the acceleration of structural changes and changing consumer preferences, leveraging these assets’ strategic locations and introducing alternative uses (e.g. healthcare and residential) to complement the centres’ retail core. The staged inclusion of these alternate sectors within our Town Centre destinations will also cement the potential for us to create discrete products in these sectors over time.  

However, structurally challenged retail assets, with lower sales productivity and little capacity to evolve into Town Centre destinations will continue to face significant challenges. In the same vein, lower quality CBD office assets will struggle to provide the flexibility tenants will be looking for. Landlords must be vigilant of these risks and adjust investment strategies accordingly. 

The outlook for Australian real estate is improving. Infection rates are low and consumer and business confidence levels are rising. The economy is benefitting from the substantial stimulus provided by governments, including infrastructure investment which will have long term benefits. While occupier markets in the major property sectors are challenged to various degrees, we expect them to benefit from the improving outlook in 2021. Investment demand remains solid, particularly for those assets and sectors that generate steady income. This includes healthcare assets, industrial warehouses and office buildings, while the retail sector may offer countercyclical opportunities as we move forward. Foreign investors still account for a large proportion of real estate transactions, attracted by a wide yield spread and Australia’s longer-term growth prospects. 

Never let a good crisis go to waste. For our year ahead, that oft repeated expression serves as a litmus test, separating potential opportunity from unmitigable risk. 

In the hopeful recovery from the COVID crisis, we will keenly observe as governments and corporates reckon with unprecedented debt. We see opportunity where stimulus and reforms lead to long-term productive employment, and corporate destinies become less entwined with monetary policy. 

As regards the climate crisis, the energy transition is a vital imperative, but is not without its costs. Courage must be accompanied by clarity in announcing policy, and actions harmonized internationally. Until then, many well intentioned projects will remain just that, underwritten solely by an optimism that the intransigence of previous decades cannot continue. 

The coming year will be one of new beginnings, but it is also just a year. Our capital is long term – and patient. We are cautiously optimistic. 

Covid-19 has threatened the survival of the market. However, despite the prevailing uncertainties, next year the economic policies, market as a whole and of course investors will become more stable and adaptive. Overall, 2021 will be a year of recovery and advancement. China will continue to play a pivotal role in pushing the global economy forward. With technology gradually taking precedence in China and overseas, the seamless connection between online and offline will enable the real estate industry to blossom. Seeing that real estate is a derived demand, improvements in consumer affordability will trigger a domino-effect on the property industry which helps to accelerate the recovery. The liberalization of household registration restrictions and the integration of core metropolitan areas in Fourteenth Five-Year Plan from the Chinese government will promote breakthroughs in business model innovation and expansion in the future. Resulting in a competitive business environment that is far more interesting and aggressive. 

The pandemic impact on office and retail demands is seemed an inevitable challenge for commercial real estate stepping into this year. Nevertheless, we strive to turn risks into opportunities by working closely with our stakeholders and embracing innovation and technology.  

Traditional tenant and landlord relationship may change, which is not solely focused on one-sided benefit, but creating win-win by collaboration instead.  Landlords should be mindful of tenants’ needs, for example placing stronger emphasis on health and wellness, while building mutually beneficial and long-term partnerships with tenants. 

Social distancing rules have accelerated innovation and “proptech” (property technology). It is crucial to cater for rising demand in spaces that enable remote collaboration, fostering a new way of user experience and optimisation.

Abundant of capital and low interest rate environment encourage real estate investment. These could be the next-horizon powers propelling the resilients into the next wave of growth.

Mainland China 

The recent announcements of the Notice of the Pilot Program and the Guidance for Trail Implementation jointly by the CSRC and the NDRC reveals opportunities on C-REIT. Demands on assets on technology infrastructure, logistic parks and data centres can be positively driven by the surging of the e-commerce and the Inner Circulation Initiative.  

It is envisaged that the post-pandemic, continuous demands on better medical care and the growth of the ageing population can benefit the rental housing real estate, especially elderly homes.  

This unprecedented experience of COVID-19 may turn the people’s new living style and their daily social life. The circumvention may cause negative implications on the cap rate of the retail real estate. Asset Owners or developers may need to explore a possible way to resolve the issue on the structural change. 

Hong Kong 

The economic downturn caused by COVID-19 may provide investment opportunities for residential property. Its relative demand is still strong in the long run due to limited land supply in medium term.  Investors should be ready to encompass with a structural change on the descending demand of the brick-and-mortar office spaces under the WFH contingency plan.  Retail property return may also be adversely affected by the change of shopping behaviour under the current social distancing during a difficult pandemic moment. 

China’s GDP grew by 4.9% in Q3 2020 according to government data. China has become the first major economy to recover from the COVID-19 pandemic. The International Monetary Fund projected that China’s economic growth would accelerate to 8.2% in 2021.  

China’s retail market continued to recover. However, retailers remain conservative in expansion. Retail market in China is still tenant favourable.  

Over the national holiday in October 2020, China recorded 637 million domestic tourists according to the Ministry of Culture and Tourism. Domestic travel is expected to dominate in 2021, and this is positive news to REITs which are managing hotels in China.  

The positive development of coronavirus vaccines also raises hope for worldwide economic recovery from the pandemic as well as the rebound of international travel.  

Trade tensions between China and U.S. may continue to pose threats to economic recovery; this will affect the leasing momentum and demand for offices in China. 

Asia Pacific Opportunities and Risks

In 2021, we see opportunities in the sectors which were operationally challenged by the impact of COVID 19 in 2020, namely retail and lodging for companies and assets which withhold long term viable fundamentals in their respective markets. In addition, the megatrends of technology, urbanization and demographics will continue to underpin the strong fundamentals of logistics and data centers which have been further accelerated by COVID, and whilst relative pricing may appear elevated, there is a structural premium being paid for the sustainability, quality and growth of longer term earnings.

Geographically, opportunities exist across the Asia Pacific region with notable opportunities in the Asian emerging markets as the megatrends of demographics and urbanization remain in place, whilst material stimulus drives the economic recovery and in turn operating earnings. Furthermore, loose monetary policies across the emerging markets will continue to support a favorable financing environment for capex and M&A whilst the weaker US dollar assists US sourced financing.

Risks for 2021 remain centered around the ongoing disruption COVID has had on the economic recovery notwithstanding the quantum of monetary and fiscal support to regional and global economies. Delays to the re-opening of economies from further outbreaks, or a delay in the vaccine deployment will continue to hamper a sustainable economic recovery and impact investor sentiment negatively. At this point in the recovery we are less concerned with the trajectory of longer run interest rates relative to risk premia and cashflows.

Despite recent news of the imminent success in developing a vaccine, there are still many uncertainties shrouding the markets. It could be months—hopefully not years—before life resume any semblance of normality.  We still believe in retail as a sector, with supermarkets and daily household necessities being relatively resilient, and e-commerce still cannot entirely replace shopping and eating out once it becomes safe to do so. But retail landlords need to be watchful of tenants that are more severely impacted by lockdown and social distancing. It is about working together to weather this crisis. As for concerns over the long-term implications of WFH on the office sector, behaviour of the few markets that have gradually reopened point to a less pessimistic outlook. After all, human being are social animals. That we CAN stay at home for months on end does not mean we WANT to do so, nor is it best for the health of corporates and their teams and staff. 

With digitisation at the forefront of the new normal, India is likely to gain on account of availability of a talent pool as well as cost arbitrage. Institutionalisation of commercial real estate is on the fast track as several large developers and institutional owners of real estate plan to go ahead with their REIT offerings in the near future. Funding environment remains conducive for large, low geared players. This low interest rate environment shall help players with a strong balance sheet to tap inorganic growth. 

With data localisation norms gaining prominence and large global data centre players having spent time doing diligence on ground, the time is ripe for development of large data centres in key cities of India which offer the required infrastructure. 

For the infrastructure sector in India, 2021 will most likely be a year marked by the completion of unfinished business that started in 2020 but could not be completed due to the global COVID-19 pandemic and other factors. A lot of groundwork has been done in 2020 by various stakeholders such as policymakers (both at the center and state levels), investors, lenders, corporates, and regulators across several sectors, that provides this comfort. The Government of India has ambitious plans for infrastructure development through the execution of its National Infrastructure Pipeline (NIP). We expect a large part of this to be government funded, but part of the funding will also be obtained through the monetization of existing infrastructure projects, which we see as a major investment opportunity for large investors in the next few years. A key risk to the pace of investments will remain potential delays in the implementation of several policy initiatives which have been announced by the government in 2020, such as the SWF/PF tax exemption for infrastructure investments.   

• Capital available in abundance and currently evaluating various transactions. We see PE investments in Indian Realty to remain strong. 
• Decentralisation is the theme that is going to get prominence in real estate. Proximity to home will be preferred over the scale of it. Be it offices, Medicare, hospitality or warehousing; companies will start focusing on decentralising the facilities rather than having mega centralised facility. 
• Grade A – rental earning Offices and Warehousing & Logistics to continue gain traction from PE investors. The sunrise sector – Data Centre, to attract many investments in 2021. Residential has will see equity flowing to a developers with focus on quality and corporate governance. Retail and hospitality receiving faster than expectations. 
• Possible future waves of COVID 19 or likewise pandemic can affect the economy significantly. Tourism (foreign and domestic) can take a big hit and can affect retail and hospitality space deeper 

• Many small size developers might find it difficult to continue their operations or complete existing projects due to cash flow mismatch 

India received significant investor attention in the digital economy in 2020, catalysed by the pandemic. Stronger macro fundamentals relative to previous downturns, an expectation that India is on the cusp of a digital super cycle and a positive policy intent in embracing structural reforms (lower corporate taxes, REITS, PLI and sovereign/pension plan incentives) contributed. 

Logistics (Inc. Data Centres) and Office (campuses, medical office-labs) are likely to attract investor focus with a positive interest rate spread creating attractive risk-adjusted opportunities in a dislocated market. Special situations across segments also look attractive albeit execution remains variable.  

Early signs of an economic recovery are encouraging, though challenges remain in terms of – vulnerability to pandemic triggered disruptions, balancing of social needs with Government’s finite resources (generate employment for unorganized sector), sustainable recovery in the financial sector and build-up in investor confidence commensurate with market liquidity. Equally, implementation of globally consistent ESG standards is imperative to retaining institutional investor interest. 

Opportunities 

Office, Data Centres, Warehousing & Industrial to continue to grow.  

Capital to Core assets remains high. FDI in real estate likely to increase. 

New Office REIT listings 

Residential showing early signs of recovery. Inventory overhang of 30-40 months remains. Key markets remain strong. 

Risk: 

Pandemic waves before vaccination and eradication. 

Inflation 

Potential rental pressure on office renewals and extensions. 

Availability of capital for stuck projects 

RERA, Customer litigations on account of force majeure or delayed construction. 

While the uncertainty around closure of the Covid threat and/or second wave could inhibit an early return to normal business activity including leasing activity, we are optimistic that there is a good potential for a bounce back in leasing demand for the Indian office sector. We expect this to be driven by an increase in technology dependency of all global businesses and the bring forward of digital transformation programmes in a geographically agnostic world. This positive demand potential coincides with the fall off in office supply by 30%. 

We also see opportunity arising from enhanced liquidity of India based REITs through reduction in trading lot size, as well as the extension to the limited number of potential debt providers to India REITs to include international investors and continuing understanding and acceptance of REIT instrument by domestic investors 

The biggest opportunity for us is in the E Commerce and In-City distribution space. India’s e-retail penetration is at 3.4% in comparison to China’s 26% and e-commerce space would benefit from India’s lowest data cost. As per a recent industry report, India is where China was 8 years back in terms of e-retail shoppers (% of population) and e-commerce would see 30% CAGR in next 5-6 years. 

The biggest risk is India’s COVID cases and fear of lockdown, derailing the pickup in economy. India has witnessed one of highest COVID cases across the world and seen one of the biggest falls in quarterly GDP numbers. 

In a dynamic and rapidly evolving economic environment the office build-to-core theme will continue to remain a promising opportunity in India. In 2021 and beyond, as the industry adjusts to higher levels of “WFH”, offices will have to be more exceptional and more inspiring to draw people in and provide the social context that drives innovation. The next generation of buildings will also have to be “healthier”, “happier”, “cleaner” and deliver more with less “contact”. A build-to-core strategy is an opportunity to start with a clean slate and respond to these new imperatives while capitalizing on the healthy spread between cap rates and development yield-on-cost that exists today. Build-to-core is also a compelling strategy for investors wanting to create long term income yielding assets while supplementing their core-acquisitions efforts that are currently facing a more competitive landscape, especially as Grade A, institutionally owned and managed office stock has continued to outperform the broader office stock through this challenging period.

With a more optimistic RBI projection for GDP growth in last few weeks and a positive outlook in Consumer Confidence Survey (Nov 20), we expect a gradual acceleration in economic activity that should achieve pre-covid levels by mid of 2021. This should boost demand for real estate and can potentially lead to a new peak in sales in last few years. We expect ongoing consolidation in the industry to pick up significant pace in 2021. On the product and customer preference front, we are already seeing some fundamental shifts on account of altered lifestyle choices for the customers such as preference for larger houses, higher demand in peripheral micromarkets of cities and a premium for larger well managed developments with superior amenities. We believe this trend to continue in 2021. 

On the risk front, the recent news of mutated and more contagious Covid strain is definitely a large variable that can impact global and Indian economy adversely. Continued momentum in government policies towards boosting real estate demand is necessary for industry growth and we hope the next annual budget provides some more impetus for the same. 

The world economy has faced an unforeseen event in the Covid pandemic and the resulting lockdown enforced in various forms worldwide. While some businesses have been able to wither the tribulations better, business activity in general has faced severe roadblocks. The Indian GDP is estimated to contract by 10.3 % in 2020 but expected to bounce back in 2021 with an 8.8% growth rate foreshadowing India's role in world trade. The next couple of years is expected to bring in a multitude of opportunities in industrial and manufacturing, Data Centers, infrastructure and real estate among others.  

Real Estate has already started witnessing bounce back in Q4 2020 with states reporting record stamp duty collections. Supply chains will and/or are getting sanitized with technology providing companies with an opportunity to integrate their supply chains with AI, big-data and health-tech and creating optimized logistics and transportation models of “low-cost to market” 

The lower rates for finance, pent-up demand, gradual return of compensation and hiring to pre-Covid levels and the WFH culture are the major contributing factors to revival of the sector. The lockdown has shifted customer spending habits and the supplier inventory handling. Industrial and warehousing will as a result, continue to grow with greater demand from e-commerce, pharma and manufacturing players. 

With the ease of restrictions in the post lockdown era, comes a greater risk of community spread of the virus and return to restrictive lockdown conditions of early stage, thus adherence to safety & Hygiene conditions is a must.  

The office market in India had been on a growth trajectory during the last four years. COVID-19 put brakes on India’s expanding office market. Lockdowns and the impact of pandemic has led to acceleration of trends like remote working and the use of collaborative technology in the short term, the long term real estate implications are still uncertain. Likely, that behavioural changes may outlive the crisis. 

While Green shoots of recovery are witnessed in the third quarter of 2020 with leasing  gaining momentum and the pace is expected to increase in the upcoming quarters. However, flexibility and tailored solutions will be key to speeding up the process. In the long term, the changed behaviours forced upon the industry will have altered the way occupiers and businesses use and interact with real estate. 

Capital flows in Core and Core Plus office assets are certain as confidence shall remain intact and as the industry reinvents itself. Some real estate players will go beyond adapting, others will fade in the backdrop of new normal. 

2021 has the makings of being a watershed year for Indian InvITs and infrastructure sector. InvITs have quickly established a robust track record of an AUM of USD26bn and market capitalisation of USD18bn since its launch in India three years ago. This momentum is likely to accelerate in 2021. 

New public InvIT launches like NHAI ( National Highway Authority of India), Power Grid (Central Transmission Utility of India) , etc is set to catapult the product with increased retail participation and standardisation of policy initiatives creating more opportunities to develop the InvIT market in India. However, a commensurate deepening of debt markets is imperative to mitigate the risk of capital constraint. It is critical that access to debt capital is improved through pre-emptive policy actions such as allowing insurance and pension funds to subscribe to debt issuances of InvITs. Additionally, pre-emptive steps are needed to mitigate the risk of climate change on the projects already operational as well as upcoming transmission projects through innovative technology measures. 

We are happy to report consumption at our 6 mn sq.ft mall portfolio is at 104% of pre-COVID levels in the first two weeks of Nov 2020.  Additionally, we have launched our latest iconic, 1 mn sq. ft mall in Lucknow, Uttar Pradesh (India’s largest state) during this pandemic. Our malls address patron's need for safe, secure and sanitized environment with convenience of parking & contactless payments. In our view, the future of our dominant malls is the engagement with mall patrons beyond the physical confines of the mall, thus integration of Digital ecosystem with the physical mall experience will exponentially increase consumption going forward.  Further, retail space in our malls is much sought after as brands look to consolidate their physical retail presence in leading town centre malls with dense residential and commercial catchments.   

Residential sales have been robust for us in H1FY21 on account of low interest rates, increasing disposable income levels, reduction in stamp duty, and need for bigger spaces with lifestyle amenities. While business travel is down, there are emerging opportunities like ‘Staycations’ at Luxury Hotels which is becoming popular among public. Commercial offices (non-IT) have been steady with rental collections at around 95% and poised to further recover. 

Opportunities - We see a strong come back in residential sales as mortgage finance rates are at 15- year lows. With negative real returns in other savings options we see asset values being firm driven by liquidity chasing yields.   

WFH is a concern for office demand but the jury is not yet out as India is still a very compelling destination for offshoring. Logistics is a big beneficiary of the rapid digitisations adoption.  

Covid-19 has accelerated digital transformation of industries globally and changed consumers’ online habits rapidly. These developments will provide great opportunities for the Indian real estate market in the following sectors: (1) Data Centers, driven by digitalization and local storage of data; (2) Warehousing, led by higher penetration of e-commerce across the country; and (3) Business Parks, responding to the increasing technology and digital work coming to India – both captive and third-party. 2021 will be an year of macro-economic recovery for India and some of the risks that could impact this recovery include a potential 2nd wave of the virus, delays in vaccine distribution, IT/ITES tenants taking longer to return to office, and overheating of the market due to large capital flows in the above sectors.

The Tokyo Olympics will be the game changer in 2021.  Japan property market has shown resiliency in 2020. Although certain asset classes, such as hotel and high street retail got hit harder than others, the overall property market remains in relatively good shape. Investors have remained positive and maintained their investment policy in Japan, with the country consistently showing stability, politically and socially by keeping this pandemic under control. 

Japan has been preparing for the Olympic Games cautiously and wisely, and now is about to get ready to welcome all athletes and visitors from all over the world with all kinds of preventive measures in place. If it happens, it will be the showcase of Japan and most importantly it will be a victory lap for overcoming the unprecedented pandemic. 

In Japan, more big projects have also been lined up after the Olympics, such as Integrated Resorts, World Expo in Osaka, Magnetic Levitation Train, etc. Among these projects, the Tokyo Olympics is not the last, but the first. The world is now eagerly waiting for how Japan will host the Olympics in 2021 and I personally believe Japan will make it!  

Valuations, fundraising and deal activity on the rebound 

We have seen real strength in companies focused in areas that have been given tailwinds from covid-19. Sectors such as e-commerce, gaming, mobile gaming, software, housing-related themes, healthcare and wellness are doing very well, whereas others, such as the retail and hospitality markets, are struggling. At no point did we see any of the panic reaction we saw during the global financial crisis. By and large, investors have maintained and more often increased their allocations and have continued investing across all strategies. We have seen a small shift favouring growth-oriented investments in some areas of the credit market, but not any significant changes in how investors are approaching the private markets. 

We are not experiencing or seeing any dramatic changes in investor appetite or their desire to keep allocating and keep investing. 

Ongoing uncertainty with Covid-19 makes it difficult to precisely assess the downside risk to global and domestic economy going forward.  Covid-19 is continuing to shock the supply and demand drivers in the economy. Only when there is breakthrough in the vaccine (i.e. approved for full use), global GDP may not be getting back to pre-virus levels. As we move into 2021 we can expect a recovery in the GDP growth of Malaysia to 6% from the 5% contraction we are experiencing in 2020.  

So where do we see the opportunities and risks as we move in to 2021? 

Opportunities lie in the notable industrial expansion that is evident in Malaysia where there is a move regionally to have factories relocate out of China to Malaysia. Demand for manufacturing and logistic facilities will be in high demand and those who saw the opportunity early will profit from it. It will drive FDI’s and employment of a more skilled workforce. Coupled with the increasing adoption of automation and AI in industry it bodes well for restructuring the Malaysian economy into a technology based one. It is a sector that is outperforming the services sector. 

Risks however remain with Fitch’s recent downgrading of Malaysia's sovereign credit rating to BBB+ from A- with a stable outlook, noting that the government's swift response to the Covid-19 pandemic and material relief measures have added to the country's fiscal burden. It may out pressure on our interest rates which could acerbate the current economic downturn. 

Risks will include the continuous ripple effect of the pandemic to the economy: the closure of businesses, the loss of an estimated 10 million jobs and its impact to 40 million Filipinos, and demand and supply risks due to uncertainties over when the world can arrest COVID-19. Things are looking up as the globe races to launch vaccines by 2021. In the Philippines, new infrastructure connecting Metro Manila to the provinces will promote decentralization and power the growth of new city centers. Households now prioritize essentials like home ownership to secure the family’s wellbeing. Affordable housing and commercial leasing will thrive under new normal systems, and digitalization will continue to be harnessed to improve the real estate purchase journey and even property management especially where health protocols, and safety and efficiency systems are concerned. A new customer experience will evolve, and developers like us have to face the new plans under the new normal. 

History suggests that from the Black Plague to the Spanish flu, global cities have not only rebounded from pandemics but also thrived thereafter, and the same goes for businesses.

In the new normal, we see tremendous opportunities for ARA Asset Management, in leveraging technological innovations to spot market trends, seize new opportunities and reshape our work and living environments in 2021, and beyond.

In a market fraught with political and economic uncertainties and a late-cycle environment for most real estate sectors, the biggest challenge and risk for many of us is the ability to expect the unexpected, manage the knowns and unknowns, and imagine the unimaginable.

What took almost three decades for paradigm shift took only three months during this global pandemic to mobilise the elephant in the room. I am not talking about China or India but ESG, the Environment, Social & Governance. The air has never been fresher, sky bluer, record low paper printing, plunging carbon emission, surging e-commerce, sky-rocketing EV share price. Never has there been such an awakening and urgency of ESG or in my humble view about Sustainability in a circular economy that is and will be making the world goes round. Any global investor would bode well to sit up and align their investment opportunities along the Sustainability theme especially in the face of a circular economy. 

The convergence of technology such as AI, IoT, Big Data is only possible because they are propelled by the advent of the transformational superpower computing chips at a nano fraction size of what it used to be. As an engineer turned fund manager myself, I can attest to that having fabricated semiconductor wafers. Data Centres, Logistics, Life Science Centres and many more are just some of the fast growing emerging asset classes. Coupling these twin forces of the Sustainability and Technology theme, core, value-add and opportunistic investors will need to embrace efficiency not just in hardware of the bricks and mortar but the quantum leap in the software of commoditising real estate. 

We see opportunities across APAC in sectors which are significant beneficiaries of underlying macro trends and today’s changing regulatory environments. Digital infrastructure & affiliated services, for example, is a significant beneficiary of underlying exponential data growth arising from increasing consumption of content, and adoption of cloud services by enterprises as they accelerate their digital transformation journeys. We see this trend accelerated in the COVID era when higher quality technology and increased capacity is essential. Further, as countries increase their decarbonization efforts, we expect continued proliferation of renewables and sustainable technologies such as resource recovery across APAC. With the intermittency inherent in renewables, we expect 2021 to witness an increased focus on hybrid and battery technologies vis-à-vis the past decade. Investors should, however, be cautious of risks arising from efficacy of govt policy implementation and economic recovery as countries look to minimize the immediate impact and consequences of the pandemic. 

CDL recognises that climate change is a business risk with financial implications, particularly for the real estate sector which accounts for 39% of GHG emissions globally. Having started our green journey some two decades ago and guided by the ethos “Conserving as We Construct”, our ESG strategy has positioned us well in the race to a low-carbon economy. Anchored on four key pillars – Integration, Innovation, Investment and Impact, our value creation business model provides us a solid foundation to mitigate and adapt to unprecedented climate and health threats. Through decarbonisation, digitalisation and disclosure, the real estate ecosystem can contribute to a more sustainable future.  

Setting Science Based Targets initiative validated carbon reduction goals has driven CDL to accelerate technology and innovation for decarbonisation and higher operational efficiency. With greater expectations for clean and safe spaces, digitalisation and artificial intelligence enable building owners to collect data and apply solutions to raise health and wellness standards when designing, building and managing assets. Our reporting experience has proven that ‘what gets measured gets managed’, robust tracking of impact can help companies improve their ESG performance and attract fast-growing ESG funds and sustainable finance. Looking ahead, doing well and doing good will certainly be a strong business case. 

Small for now but not for long. ESR Kendall Square REIT recently listed in Seoul with a market cap of just USD 690m will likely become one of the larger logistics REITs in Asia in the not too distant future. Similar to GLP J-REIT, Nippon Prologis and Mapletree Logistics, this REIT’s sponsor boosts a significant pipeline to provide support.  ESR Kendall Square’s local management pioneered modern logistics facilities in South Korea while at Prologis and now find their company with the largest development pipeline of logistics real estate for third party use by a wide margin. Their main customers are firms like Coupang (Korea’s Amazon) and e-grocer Market Kurly are winners in the ecommerce space.  Their ESG focus has helped them earn a Well Certification for one property making it one of only two logistics developers to be awarded one. We expect their growth to mimic that of other successful Asian Logistics REIT and to become one of the most investible Korean REITs.  We are also hopeful that KREITs as an asset class will develop given the recent moves by the South Korean government to stimulate a public REIT market in Asia’s second largest developed economy, number four overall. 

At a time of heightened uncertainty, Knight Frank’s Active Capital research finds investors are increasingly positioning their portfolios for resilience. This includes identifying assets with strong tenant demand – underpinning capital values and ultimately returns – as well as assets which are best placed to weather shocks, and benefit from the recovery and broader structural changes.  

The office sector will continue to play a prominent role in global allocations. Within Asia Pacific, the office sector remains dominant, attracting 45% of all transaction volumes in the first nine months of 2020 ; however, the market share for industrial assets has increased by more than 50% compared to its historical five-year average as investors seek to increase their portfolio weightings in the sector. 

Our research forecasts capital from Singapore and Hong Kong will dominate global investments in 2021 alongside other major markets like the US, Canada and Germany. Outbound investment from Singapore into Australia will reach US$3.82billion in the next year, 28% above the 5-year average of US$2.98 billion. With its stable long-term growth prospects, Australia will continue to attract strong cross-border interest from Asian investors. 

While recovery may lag, capital flows between liquid and trusted global safe havens will continue. The notion of positioning for resilience will be at the heart of any investment decision. 

SC Capital Partners (SCCP) is a pan-Asian real estate focused fund manager, which invests across the Asia Pacific region and across the risk/return spectrum.

Biggest opportunities:

• Hospitality: Japan, Thailand and Vietnam in that order. The focus will be on unique and hard to replace assets, which had healthy cashflows pre-COVID, but are currently struggling due to the lack of income. This is a 2-4 year recovery play. Low to medium in execution risk spectrum.
• Logistics: China (Shanghai, Shenzhen, Guangzhou), Japan and South Korea. This sector continues to perform well due to the growing middle class and the rise of E-commerce. Japan last mile logistics is particularly of interest.
• Student accommodation: Japan, New Zealand and Australia. The education sector is a growing market, but the barriers to entry are high, especially in Japan. Focus is on assets with master leases from strong and creditworthy lessees with a large pool of domestic demand.
• Offices: Tokyo, Hong Kong (distressed) and Australia. Focus on growth corridors rather than central business districts with governmental tenants with a focus on long leases of 10 years and beyond. Avoid fringe locations.

Biggest risks:

• Development: Vietnam, Maldives and Thailand. Due to COVID-19, the risk/return trade off isn’t there to justify such a strategy.
• Loans: second loss/mezzanine positions. Credit is of great interest, but through a junior/senior position vs. a deeply subordinated rank.

Efforts to accelerate the decarbonisation of the economy will certainly be central to a lot of opportunities in Asia next year, be it in the infrastructure or real estate sectors. With countries like China and Japan declaring their net zero targets, the momentum is real and gaining pace.  We continue to see interesting opportunities in the renewables and energy storage sectors across Asia.  Similarly, digital infrastructure’s importance in the economy is undeniable and will continue to grow rapidly in the coming months. 

The risks are also clear; with economies battered by the pandemic, the global and regional aviation sector has been struggling and will likely continue to only see a modest recovery next year.  As infrastructure spend is closely tied to government budgets, there would be more prioritization of projects that truly matter.  

With the instability arising from the Trade Wars as the world become even more polarised, political challenges in the United States and the COVID-10 Pandemic spreading largely in the Western part of the world and the relative calm in this part of the world with the recovery from the Pandemic lockdown, we can see fresh opportunities with the fund flow particularly from the West and China; making Singapore and this region a very attractive destination for all forms of investments, particularly in connection with Real Estate and related class of asset.    

• The pandemic has caused the sharpest global recession in decades. Despite widespread disruption, there is also an increase in optimism due to recent vaccine announcements but this needs to be tempered with timing and winding back of government stimulus measure.  
• Asset availability will likely be enhanced in 2021. Developers will continue to be an active seller, either cutting down their gearing ratio or recycling their capital, especially in China where the new policy regulation limits developers debt limits. On the other hand, corporate earnings have been impacted and more companies will consider monetising their assets, therefore sale and leaseback deals are likely to increase in 2021. 
• Tenant creditworthiness, covenant strength, lease length and durability of income stream are the overriding criteria guiding potential acquisitions. Business parks are likely to be a focus amid generally resilient demand from tech and life sciences companies. 
• The logistics sector will continue to enjoy an increase in e-commerce penetration. The growing demand for fresh food, medical products and the upcoming vaccine, will drive demand for temperature-controlled storage facilities. Last mile facilities and the re-development of outdated warehouses continue to draw interest.  
• Data centres are now firmly established as a mainstream investment class. However, operational risk and securing planning approvals remain a challenge, resulting in a preference for investors to form partnerships with operators to minimize exposure. 

The biggest opportunities and risks lie in the ongoing fiscal and monetary policy response to Covid. A data-driven and well-balanced fiscal and monetary response could ensure a quick, sustained and broad recovery of economic activity. On the other hand, an uncoordinated and/or insufficient response relying too heavily on either fiscal or monetary policy could lead to a faltering recovery and could precipitate long-term structural challenges like rising inequality and political upheaval (in the case of excessive monetary easing driving asset prices higher while wages and job growth fade) or rising inflation and debt crises (in the case of excessive fiscal stimulus). Policymakers’ ability to coordinate responses and their ability to react quickly and competently to a changing environment will be crucial in 2021. 

Asian property markets are set for an exciting 2021, after ending 2020 down 16.6%.  Record levels of fiscal stimulus, is driving regional and global GDP and putting income in the pockets of consumers, that is helping drive retail sales, and a rebound in regional house prices, that in turn is driving the wealth effect and giving consumers the confidence to continue to spend.  This is benefitting the retail sector, but also accelerating the migration of both consumers and retailers, into the e-commerce sphere.  Industrial property is the clear beneficiary here and in our view will continue to benefit given the higher levels of expected rental growth and comparable property yields.  In a similar vein, data centre REITs should have a good 2021 and beyond, given the structural shift to off premise data, along with increasing workplace flexibility, and the long lead times necessary to implement such a strategy.   The obvious risk here is for the office sector, with likely rising vacancies across the region, and uncertainties regarding occupancy strategies for years to come.  Of course, much of the above is known, and depends on REIT pricing, but with the COVID19 pullback in pricing in 2020, along with record monetary stimulus, leading to record yield spreads to bonds, and arguably a shortage of quality income yield options for investors, there is clear opportunities in many of these sectors, which is illustrated by our 2021 total return forecast of 15%.

Climate change and its integration within Real Estate investing will be one of the defining trends of our century,  given real estate assets contribute over a third to the overall warming of climate.  Second,  will be the integration of China’s capital markets into the global networks. However,  the biggest risk to both these course altering events largely remain the uncertain political backdrop amongst the worldssuper powers.  At no point has politics played such a key role in our daily lives as it does today. 

Real estate in a mixed asset portfolio is providing several attractive characteristics, from good income returns, capital preservation to diversification opportunities. On top of this, recent analysis by AEW shows at the city-sector level Asia Pacific real estate markets are providing good risk-adjusted returns on a forward looking basis. The majority have expected returns higher than their required returns.  

2021 will present opportunities for astute investors. Some assets will come to market having been re-priced while others have had their demand side drivers accelerated. There will be a few gateway office markets where assets will come to market at attractive pricing relevant to the ability to underwrite income. Logistics has clearly seen occupier demand leap forward and capital will continue to be allocated to the sector, firming pricing through lower cap rates. Retail is clearly more difficult to feel certain about income but small centers focused on daily spending patterns will be the most defensive segment. In addition to the traditional sectors, returns can be increased or portfolios can be diversified with allocations to asset types like data centers or student/senior housing. 

The global trend towards a sustainable model of economic development will strengthen our position in 2021. Our customers - office centres, hotels, hospitals, airports, shopping malls, data centres in Asia, the Middle East and Europe, are also strongly committed to optimising energy consumption in 2021. At the same time, office centres and hotels are highly susceptible to the negative impact of the pandemic due to lack of occupancy. Therefore, we plan to pay more attention to hospitals and data centres, i.e. where power bills are still through the roof. 

I expect heightened restructuring and consolidation activities in the listed real estate sector in Asia Pacific next year. The Singapore REIT sector alone has witnessed close to US$40bn of M&A transaction values in the last two years. Approximately US$120bn of listed real estate and related companies (in Singapore, Australia and HK) have been delisted since 2015. The confluence of pandemic, excess liquidity and significant dislocations in public market valuations will be key catalyst for increased M&A transactions in the region.  

One key risk is the effect of prolonged impact from the pandemic exacerbating P&L recession and balance sheet erosion of real estate companies, especially in sectors such as hospitality, retail and co-working. 

Risks and opportunities go side by side. I think we can unanimously agree on one key risk for the next year –heightened uncertainty. The impact of the pandemic will continue to haze the outlook on recovery. Central bank liquidity injections will continue, and so will the dichotomy between earnings and valuations.  Consumer confidence will remain vulnerable due to virus-related health concerns (i.e. volatility in earnings). However, on the flipside, markets where the ‘health scare’ is reduced (e.g. Singapore, China), there is early evidence of a consumption recovery. Hence, it is clearly a timing issue. Not if but when. And with that time test comes a serious trial of balance sheets. Strong franchises/ businesses with a vulnerable capital stack will re-organize their liabilities (i.e. re-finance or sell). This will result in interesting opportunities for well-capitalized, thoughtful buyers. The risks are evident, the opportunities not as much. It is indeed going to be a very interesting 2021.  

Fasten your seatbelts! 

Looking ahead, with the global economy expected to rebound and GDP growth across the board comes back on track, we are expecting it to be positive for real estate in general, amidst a low interest rate environment. With ample liquidity in the market on the back of inflationary pressures, we see real estate being more attractive to investors, compared to other asset classes. 

In Asia in particular, we are expecting the industrials and logistics sector to continue to do well. These assets merit lower risk premiums as over time, cap rates are likely to remain stable or fall. Additionally, high-quality and core investments in such assets are likely to produce stable and reliable returns in the near-term. 

The biggest opportunity in 2021 would be Logistics and specifically the Cold Storage logistics facilities, which are accelerated by the arrival of the COVID-19 vaccine. Vaccines are temperature-sensitive and would require billions of such facilities to ensure vaccines are effectively delivered to the masses around the world. Investors who are early into the investment cycle for Cold Storage logistics will be rewarded handsomely.   

The biggest risk is the longer than expected recession that continues to take a toll on the economy, wiping out even more small and medium-sized businesses, especially with the resurgence of second or third wave of COVID-19. 

Opportunities 

With increased conviction in Asia-Pacific real estate, both intra-regionally and globally, we will see ever greater allocations. Larger perpetual vehicles, more public market exits, and new long-term capital sources will support the regions ascendency. 

Pricing discovery is progressing, with a noteworthy ‘risk off’ trend largely supporting prime asset values and even some capital appreciation. Ample liquidity and confidence slowly returning will encourage more transactions, albeit perhaps not fully until Q3 onwards.  

Previously untouchable assets will trade due to corporate level pressure. Conversely, cash rich end users will continue to acquire strategically. Unloved segments will come under further strain, producing interesting buying opportunities for either repurposing or contrarian investors. 

Risks 

Bid ask spreads remain wide in places, especially higher up the risk spectrum. Muted short term rental growth prospects and more antiquated assets may be limiting factors on return expectations. If lenders stay as accommodative and closed ended funds successfully roll over this will inhibit trading activity. 

The challenge for many will be adequate access to their favoured product types and the requisite expertise. Deployment and portfolio reweighting risks could be features with insufficient ‘new economy’ assets to match appetite.